The Bahamas has approved a new cryptocurrency law that aims to adapt to how the sector has changed since 2020, following the collapse of Sam Bankman-FrittoFTX and the failure of Make KnownTerraform Labs.
The Digital Assets and Registered Exchanges Act 2024 (known as OSA 2024) introduces in particular new rules for companies that provide custody of digital assets. These regulations appear to address the mistakes made with FTXwhose headquarters were located in the island state.
This includes requirements to maintain “appropriate procedures” that keep digital assets “separate and isolated” from corporate assets, as well as separating holdings from “other digital assets not owned by customers.”
FTX’s collapse was partly the result of mutual funds of customers and companiesthat made it impossible for customers to withdraw their assets following a run on the exchange. Prosecutors in the trial of Bankman-Fried, who has since been convicted of fraud and sentenced to 25 years in prison, said the intentional commingling of assets allowed sister trading firm Alameda Research to use FTX Client Funds for his trading activities. Co-founder of FTX by Gary Wang testified at the trial that Alameda Research might withdraw “unlimited funds” from FTX.
DARE 2024 also introduces a “disclosure regime” that requires staking services to provide key information about the staking process, including how the asset is staked, the rewards expected, and any potential penalties the customer may face.
Staking requires cryptographic network participants to pledge their tokens to the network for a certain period of time to help validate transactions and secure the network. In return, users receive yield, which are rewards in the native token. Some centralized exchanges They offer staking as a service for the cryptocurrencies they hold for customers.
The bill also implements a comprehensive stablecoin framework, which aims to define stablecoins and regulate reserve assets. This includes requiring stablecoin providers to report their reserve assets and a ban on algorithmic stablecoins.
This is probably due to the disappearance of Terraform Lab chaotic algorithmic stablecoin UST, which lost its peg to the US dollar in 2022. In a matter of days, UST dropped to $0.65 then it quickly fell as as low as $0.30wiping $11 billion off UST’s market cap and taking Terraform Lab’s LUNA token with it. Before its collapse, Terraform Lab’s LUNA was at one point the world’s fourth-largest cryptocurrency, with a market cap of over $40 billion.
The collapse of Earth caused a contagion that lasted for years across the cryptocurrency industry, causing startups exposed to the company to fail. And that then caught the attention of regulators. U.S. Treasury Secretary Janet Yellen quoted The collapse of UST is yet another reason why stablecoins need to be regulated.
The Bahamas has introduced a number of other provisions in DARE 2024, including expanding the definition of “digital asset activity” to include staking services and standards addressing conflicts of interest with third-party relationships. The move comes as the Bahamas aims to become a leader in digital asset regulation, according to a Press release issued by the country’s Securities Commission.
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